Sunday, January 07, 2007

Business Cent: Run a software company like low cost carrier

While having breakfast with my brother, I discuss the pricing problem faced by software solution provider. Let’s assume you are a software freelancer and you charge RM 300 for one day of work (mandays), and the maximum you could earn is RM 300 x 20 = RM 6,000 per month. Bear in mind you probably won’t get paid for everyday of the month due to non-payable work (like administration, meeting, delays, laziness, etc) and lack of jobs. You could probably get RM 2,000-4,000 per month on average, which should be quite alright if you are still below age of 25. As you get older with a more demanding lifestyles and loans, and plus inflation (think of toll and petrol hike), it would be necessary to raise the mandays rate to RM 400 or 500 in order to have a comfortable living. But as you raise your rate, there would be less company who could afford or willing to pay your rates, thus you loose out on some business. As usual, there would always be more fresh graduates who are willing to throw prices for some extra pocket money.

Let’s imagine you are a company with a physical establishment and employees, and then it would be impossible for you to offer a rate of RM 300. The running cost of company is much higher than of freelancer, with rental, software licenses, utilities with corporate rates, office furniture, supply and maintenance, salary and EPF, 28% corporate tax, allowance and claims. Though I have not calculate the actual running cost of a small software company, but I guess the rate of RM 600 per mandays is just enough to break even and perhaps to make a small profit if we are lucky. If we would want to run a profitable business so that we can afford to give our staffs yearly increment and bonus and still make good money, then we should charge for a mandays rate of RM 900-1,200. With such a rate, you would even be less competitive, loose out on more businesses and have to resort to catch some bigger fishes with lengthy sales cycle.

So, how should a software company survive then? Some might say forget about the small fishes as we should always think big and make it big, as the small fishes are not really lucrative anyway. Theoretically this might be true, and experience had thought me otherwise. When the fishes are small, it’s the best time to build a relationship with them. It’s the time to offer them low or affordable rate, to prove our capabilities, to gain their trust, so that they could continue to give us more jobs, or introduce us to other small and big fishes, or one day they could turn out to be bigger fishes themselves. Perhaps all is part of business and relationship building. When we approaches big fishes with no previous engagement, they would appreciate us less, don’t trust us yet, and they have more options and bargain power. So, it could be difficult to get it, not to mention the long sales cycle, bureaucracy, politics, and perhaps “personal favor” involved. The big fishes are hard to get, unless you are a big fish yourself. So perhaps the keys lie in getting them while they are small.

Let’s assume we agree to go with small fishes, but we can’t afford to go lower than RM 600 per mandays. My brother’s theory is to run the company like the low cost carrier, put out a low fare which we are comfortable with and get as much job as possible until we break even. When we have enough jobs in hand, then it’s time to raise the fare to capture some medium and big fishes, and thus we get our profit and growth from. I know isn’t exactly like a low cost carrier, but there are some similarity and the theory sounds interesting.

So it’s mean it is almost impossible to work with one single rate. When we have fewer jobs, we should offer a rate of RM 600 or less. With this, it could help us to cut losses, break even and build relationship with small time customers (which we hope would reap fruits in the near future). When our hands are full, it’s time to raise the bar, offer some premium services, raise the bar and play hard to get. With this strategy, hopefully we would achieve our mission of customer relationship building and profitability at the same time.

There is an old Chinese proverb, “Big got big do, Small got small do”. Perhaps it isn’t too smart to be picky and choosy, we just have to do it right and make sure we don’t loose money. Planting trees is equally as important as timbering.